Feb 4 The U.S government has launched a civil
lawsuit against Standard & Poor's and parent The McGraw-Hill
Companies Inc over mortgage bond ratings, the first
federal enforcement action against a credit rating agency over
alleged illegal behavior tied to the recent financial crisis.

The government said in a court filing it was seeking civil
money penalties from S&P and McGraw Hill.

Shares of McGraw-Hill plunged 13.8 percent on Monday after
the company said it was expecting the lawsuit, marking their
biggest one-day percentage decline since the 1987 stock market
crash, according to Reuters data.

The news also caused shares of Moody's Corp, whose
Moody's Investors Service unit is S&P's main rival, to slide
10.7 percent.

It is unclear why regulators may now be focusing on S&P
rather than Moody's or Fimalac SA's Fitch Ratings.

S&P, Moody's and Fitch have long faced criticism from
investors, politicians and regulators for assigning high ratings
to thousands of subprime and other mortgage securities that
quickly turned sour.

"This lawsuit is significant because it could augur future
government action or, even worse for the agencies, more
litigation by investors," said Jeffrey Manns, a law professor at
George Washington University in Washington, D.C.

A civil case involves a lower burden of proof than a
criminal case would, and could make it easier for investigators
to uncover potential "smoking guns" through subpoenas, he added.

The New York Times reported that talks between the Justice
Department and S&P broke down last week after the government
sought a settlement of more than $1 billion.

NO MERIT TO LAWSUIT, S&P SAYS

S&P said the expected Justice Department lawsuit focuses on
its ratings in 2007 of various U.S. collateralized debt
obligations.

The rating agency had previously disclosed a probe by the
U.S. Securities and Exchange Commission into its ratings for a
$1.6 billion CDO known as Delphinus CDO 2007-1. It was not
immediately clear whether that CDO is a focus of the case.

"A DOJ lawsuit would be entirely without factual or legal
merit," S&P said in a statement. "The DOJ would be wrong in
contending that S&P ratings were motivated by commercial
considerations and not issued in good faith."

In a variety of lawsuits brought by investors, S&P has
maintained that its ratings constitute opinions protected by the
free speech clause of the U.S. Constitution.

Justice Department spokeswoman Adora Andy and Moody's
spokesman Michael Adler declined to comment. Fitch spokesman
Daniel Noonan said: "We are unable to comment on the S&P matter
as it does not involve us, other than to say we have no reason
to believe Fitch is a target of any such action."

Several state attorneys general led by Connecticut's George
Jepsen are expected to join the case, said the person familiar
with the matter, who was not authorized to speak publicly.

Previous lawsuits from Connecticut and Illinois accused S&P
of violating consumer fraud laws by stating its ratings were
objective, even though it ignored increasing risks of the
securities in order to cater to the investment banks that
provided the firm with revenue.

A spokeswoman for Jepsen declined to comment. The Wall
Street Journal first reported the pending charges.

The attorney general in New York is continuing a separate
probe of the rating firm, a person familiar with that inquiry
said.

In Monday trading on the New York Stock Exchange,
McGraw-Hill shares closed down $8.04 at $50.30, and Moody's
shares dropped $5.90 to $49.45.

One potential winner in the news of the pending lawsuit is
David Einhorn, who runs the $8 billion hedge fund Greenlight
Capital. Einhorn told Reuters in 2010 that he began shorting
McGraw-Hill and Moody's in 2007, and had no aversion maintaining
those bearish positions in the years to come. Greenlight
declined to comment on Monday.

"KEY ENABLERS" OF MELTDOWN

The ratings agencies have long been scrutinized, in part
because they are paid by issuers for ratings, a standard
industry practice that has nonetheless raised concern about
potential conflicts of interest.

In January 2011, the Financial Crisis Inquiry Commission
called the agencies "essential cogs in the wheel of financial
destruction" and "key enablers of the financial meltdown."

McGraw-Hill had acknowledged last July that the Justice
Department and SEC were probing potential violations by S&P tied
to its ratings of structured products, and that it was in talks
to try to avert a lawsuit.

Last July, Mizuho Financial Group Inc agreed to a
$127.5 million settlement to resolve SEC allegations that a U.S.
unit obtained false credit ratings for the Delphinus CDO.

The following month, a Manhattan federal judge refused to
dismiss a lawsuit brought by Abu Dhabi Commercial Bank, King
County in Washington state, and other investors against S&P,
Moody's and Morgan Stanley over losses in Cheyne, a
structured investment vehicle.

Cheyne went bankrupt in August 2007. A trial is scheduled to
begin on May 6, court records show.

In its statement, S&P said it "deeply regrets" how its CDO
ratings failed to anticipate the fast-deteriorating mortgage
market conditions, and that it has since spent $400 million to
help bolster the quality of its ratings.

"The lawsuit itself may prove less significant than the
message it sends," said Manns, the law professor. "Filing a
high-profile lawsuit against S&P tells the rating industry at
large that the government is serious about holding rating
agencies responsible, and that they must be much more careful."

EDINBURGH, Dec 9 Shares in Capita fell
further on Friday after a profit warning and the decision to
sell its asset management business left investors questioning
the British outsourcing group's strategy.

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